Blowing Bubbles

We are now in the FOURTH consecutive financial bubble, all contrived to sustain the international investor class - to the detriment of the general public. The latest bubble will cause much worse destruction than any of the previous ones. And it's already out of control...

Lacking its once powerful manufacturing-based economy, the United States has come to depend on one financial “bubble” after another to keep its economy afloat. Unfortunately, each successive bubble aids fewer people and costs more in the end to clean up once it’s popped. The dot.com bubble was followed by the Enron bubble, then the housing bubble, and now the commodities bubble. Each of these has caused progressively more damage to the value of the dollar and a disproportionate harm to the middle class.

The dot.com bubble made many instant millionaires, but far more losers in the end. Clearly it was fueled by hope and the belief that the internet was going to transform the economy. Of course, that it has done, but there was a point in 1999 when the stock value of Amazon.com exceeded that of General Motors. At that time, any visitor from Mars could see how ludicrous that was. At the time, Amazon had only rented warehouse/shipping facilities and a website that sold books and CDs, while GM had a century’s accumulated patents, subsidiaries including GMAC, Frigidaire, Hughes Aircraft, and extensive, international real estate. That simple metric made the nature of that bubble clear as the glass on a Cadillac. Only greed or total ignorance kept anyone hanging on to overvalued internet startups beyond 1999. In truth, the web today is a very thriving place to invest, as more people turn to it for commerce and entertainment. But ten years ago it was all based on belief in the conceptual.

The Enron bubble was a world-class swindle, enabled by a heavily lobbied California legislature and Governor (Wilson) that deregulated the wholesale provision of electricity, allowing – well, forcing – the sale of utility-owned generation plants to Texas companies like Enron and Williams, but not deregulating the provision of electricity to the consumer. The “free marketers” were freeing the market, as usual, for themselves but not the public. A complicit Republican congress and well-lobbied SEC, in 1997 allowed what has become known as the Enron Exclusion, eliminating part of the Investment Company Act of 1940, thus allowing off-shore subsidiary companies to hide speculative investing that drove up the markets in which Enron sold futures. Investors got in the pyramid scheme so deeply that they were buying futures on the weather. That is not investing; that is casino gambling. The exploits of Enron cost Californians billions in overcharges for power during the excessively hot summer of 2000. The collapse of Enron, in turn, cost investors and that company’s own employees their future. In spite of that monumental fiasco, the Enron Exclusion is still in place – eight years later.

Seeing the last bubble go splat, the still-Republican Congress pulled out the biggest wad of Double-Bubble yet, and took a nuclear-armed Bazooka to the economy in 2000, with the repeal of the 1933 Glass-Steagall Act. Now enabled to tread where no bank or investment house could for 65 years, everyone could get in on the act, from the lowest-wage home buyer to the titans of Wall St. Only this time, armed with the deregulated environment created from both the Enron exemption, allowing them to use foreign subsidiary entities to place bad receivables off the books, and the newfound access to cross-divisional activity (banks selling securities and brokerages maintaining checking accounts and mortgages) the investment houses, brokerages, insurance companies and banks all had carte-blanche to get in the game. This time they had Greenspan and his magic near-zero interest rates helping them along. Once again, when the pyramid began to fall, millions of homeowners and small speculators went with it.

Certainly there is a perilous shortage of grain. But it didn’t occur overnight, anyone watching knew that the diet of many in large population developing nations was changing, and could have seen it coming. Anyone paying attention could see that the American corn crop was being misused on etha-hoax fuel. Yet, the grain market skyrocketed exponentially in the last ten months because speculators got in, and, acting out of fear, many countries reacted by withholding otherwise marketable rice, wheat, and corn.

Bill Maher recently pointed out that had we elected Colonel Sanders President, fried chicken would probably go to $100 a bucket. But we elected Texas oilmen, and, hence, oil has quintupled since they took office. But the barrel price of crude is a purely speculative game, and most of what the oil companies extract is paid for on long-standing royalty agreements. ExxonMobil is most certainly not paying $126/barrel for the crude oil that they extract. Still, it is enough for the public, witnessing these trading prices to assume that the price at the pump is justified. In Los Angeles and New York, the premium gasoline is now $4.50/gallon – and still climbing. If there were any corollary between the per-barrel cost and the price, gasoline would be $5.50 by now, and ExxonMobil would not have seen their profits quadruple. So one thing has nothing to do with the other, and there is no free market, once again, to the public. Certainly no chain of gasoline stations is competing to drive prices down. So, again we have a very tangled web in commodities, derivatives thereof, and global politicization of food and energy.

The only investment commodity that seems real and invulnerable right now is precious metal, particularly platinum, as it has the most (and the most future-) industrial applications over and above its intrinsic value. Still, the metals market took a beating recently as investors (some of whom were whole countries’ treasuries) needed to liquidate gold and platinum to meet margin calls on downgraded securities – a bleed continuing from the mortgage fiasco.

Is there more to this? Certainly. The media, especially the business media are jumping aboard touting every new high reached by crude oil as if it will double again – and exhibiting the same curious sense of glee with which they reported how fabulous it was that a 1500 square foot house or condo had gone over a million, or 1.5 million dollars. Those were not, in the long run, values to be cheerful about, and neither, most certainly, is the artificially inflated price of food or fuel. Sure, it’s great if you’re presently heavily invested in those things, but they too will burst, only after starving millions of people, and driving millions more to bankruptcy court from sky-high fuel costs. So who will be left with a big pink blob of goo on their face this time? And will it have been worth it? This one could have been averted by transforming to a renewable-energy based economy years ago, and ironically, the burst will be caused by the decline in demand once we do make that transformation.